After 15 years of recruiting and coaching we see definite patterns from professionals which shape and lead their behavior. I have come up with 6 rules for incentive compensation to attract and retain top professionals. We hope this article arms you with more information as you look to improve the level of talent at your organization. |
Aligned with Ownership and Leadership Objectives.
Incentive programs should be financially aligned with the objectives of the ownership and executive leadership with respect to which areas of the P&L the professional can impact. If the goal is to increase shareholder value, a great metric for management and executive leadership should be bonuses based on EBITDA achievements. It is amazing how quickly alignment takes shape within organizations when incentives are tied to profitability. |
Keep it Simple.
Some years back, an Executive Vice President of a $3-4B ProDealer made this statement to his team of managers and sales professionals at a companywide function, "I don't currently understand the incentive program, but when I do you will be will first ones to know." The next week our phone rang off the hook, as the top talent from that company knew it was their time to leave. Simple incentive programs and unveiled P&Ls build trust and increase the alignment within the organization. Complicated incentive plans build mistrust. Most top professionals understand the more complicated the plan the greater the chance it does not mutually benefit them. History has proved them right. |
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Uncap the Incentive.
On the compensation front, nothing aligns the goals of an organization and its employee more than an uncapped bonus program. As the theory goes, the business metrics and measurements increase; the professional makes more money. The greater the company profits the higher the incentive paid.
It is a rare circumstance where capped compensation benefits any organization. Capped compensation, such as a percentage of base salary, limits the behavioral leverage companies have with top performers. Further, incentive caps drive the top 20% performers out of your company. The number one reason candidates give us when asked why they are leaving is, "Looking for growth." If forecasting measurements are in place and there is a clear definition of what "winning" looks like, top performers will lead companies toward uncovered profit opportunities. If designed correctly, paying out big bonuses becomes a pleasant event because everybody wins. |
Base and Incentive Balance.
In an effective compensation program the base vs. incentive compensation will correctly reflect the appropriate risk and rewards of the business success or failure. If the resources, strategy, and financial metrics measurements are aligned, top professionals will take less in base income for higher earning potential through incentive compensation. The assessed and understood risk to incentives allows companies to reduce the amount of guaranteed income. Top professionals need enough base income to cover essentials but higher base salaries can over indulge any professional and create undesired behavioral patterns. The resources + strategy + financial metrics = base/incentive algorithm works in reverse order also. If you feel your base incomes need to be higher to attract top talent your organization maybe lacking resources, strategy, or the right financial metrics. |
Discretionary vs. Measured.
We have a near 100% close rate when a professional is coming from a culture with a discretionary bonus. On the surface we can take the perspective that top professionals are looking for a challenge and the opportunity to reach for a higher reward, "Growth" as we mentioned earlier, but the answer is much bigger than that. We have found companies who utilize discretionary bonuses typically hide their financial performance, horde profits, and spend their time fearful their people will learn how much profit they are generating. We call this the "mushroom syndrome" simply defined as: Keeping their people in the dark and feeding them a line of bull&*#@. Let's be honest, ownership takes on significant risk and that risk should be rewarded, but if a company feels the need to hide their profits from their people, either the leadership or the people need to change; it is a key indicator of an unhealthy environment.
Measured incentive programs promote a culture of unity and alignment. Communication is open and candid. Successes and failures are shared by everyone as they are all searching for the solutions looking out for each other's mutual benefit. Competition is healthy, often pushing the top talent to extraordinary efforts that bring the results. |
Don't Renege.
We have witnessed many situations where owners and leaders decide to not pay out incentives after previously agreeing to the terms. Ego and greed get in the middle and cause great harm and damage to the integrity of the company and relationships. I realize for many it seems unfathomable, but we were prompted to include this point due to the frequency of this rule being broken. |
